Option trading and returns versus the 52-week high and low

Abstract

We show that option traders suffer from the anchoring effect induced by the stock price's 52-week high or low. Specifically, (1) trading of all options decreases as the stock price approaches its 52-week high or low, (2) the buy–sell imbalance for calls decreases and that for puts increases as the stock price approaches its 52-week high, and the opposite occurs as the stock price approaches its 52-week low, and (3) the subsequent delta-hedged option returns for both calls and puts are higher as the stock price approaches its 52-week extreme.